Welcome to United Spirits Limited, Diageo India's second quarter earnings conference call. Hosting the call today from USL Limited are ENA Nagarajan , Managing Director and Chief Executive Officer, and Pradeep Jain, Chief Financial Officer. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to ENA Nagarajan . Thank you, and over to you, ma'am.
Thanks so much. Hi, good evening, ladies and gentlemen. Thank you for joining us on the second quarter earnings call of United Spirits, Limited. At the outset, I would like to take the opportunity of wishing all of you and your families a very joyous and safe Diwali. I hope you had a lovely unconstrained celebration this year after, you know, a couple of years of, very quiet Diwali during COVID. As always, it's a delight to interact with all of you, and I'm joined today by Richa, our investor relations head, and Pradeep, our CFO. I intend covering the following today in the opening comments. A little bit on the consumer context in the current environment as we are seeing it.
A short update on the key pillars of our strategy communicated last year, especially the portfolio reshape and the Society 2030 goals. Some context on the results that we announced last Friday, and then we can open it up for Q&A. On the consumer context, while inflation has been a bugbear in the recent past, the larger consumption story anchored in premiumization continues strongly for our consumers. Premium and luxury consumers are driving growth ahead of middle India prestige consumers, and the latter are also coming back though to pre-COVID growth trajectory. Affluent consumers continue repertoire drinking, with non-whiskey categories like gin and other white spirits gaining further traction. This is also indicative of consumers increasingly wanting to drink better, not more.
Among the middle India consumers, while we are witnessing downgrading in the larger FMCG space, I would say the prestige consumers in our category are managing their wallet share by moving to smaller sized SKUs, but not downgrading to lower priced brands. This is reflective of the brand affinity in our category. On the strategic side, on our strategy pillars, our portfolio reshape strategy is accelerating. We have covered a lot of ground, and we are relentlessly at it. We had announced earlier in the quarter that an investment of INR 45 crore was made by the company for its state-of-the-art craft and innovation hub in Ponda, Goa. This investment is in line with the company's strategy to accelerate transformational innovation and strengthen our craft and premium portfolio. Our recent innovations and renovations position us better to meet changing consumer tastes and preferences and will propel growth.
Godawan, our Indian single malt, is now available in five states, Rajasthan, Delhi, Goa, Karnataka, Haryana, and launched in the international markets of UAE. It will soon be available in the U.K. and in the United States as a liter. Black Dog renovation that was rolled out last year continues to be well accepted by consumers, leading to continued momentum on the brand. We continue to scale up the campaign with global icon Keira Knightley across digital platforms as well as out of home. Royal Challenge American Pride has now become available in eight states. During the quarter, we are launching this brand in October in three more states, Maharashtra, Rajasthan, Punjab. On Signature, the momentum from the renovation last year continued on the back of significant improvement in consumer equity, with consumers really appreciating the creamy blend and differentiated packaging and crafted from nature propositions.
With focused energies on Royal Challenge, we have been able to lead the growth in that segment in this quarter. It grew on the back of both competitive pricing as well as renovation, especially in the states of Maharashtra, Telangana, Delhi, and we are now in the process of extending the renovated Royal Challenge to other states in the country. On McDowell's Number One, our intellectual property of Yaari Jam, with its tributes to the singer KK, has driven huge engagement with over 2 billion views and a first of its kind consumer engagement in the relevant C space. Despite segment headwinds, this is one segment where we do see some impact of you know the inflation. Despite those headwinds, McDowell's Number One has delivered really good performance.
Last but not the least, a critical component of our portfolio reshape strategy, we have successfully completed the sale of the entire business undertaking associated with 32 brands in the popular segments to Inbrew Beverages Private Limited, and have given effect to the franchise of 11 other brands in that segment for a period of five years. The completion of this transaction ENAbles us to unequivocally focus on Prestige and Above, and capitalize on the rapidly changing consumer and category trends. Five manufacturing facilities have been transferred, four of these third party and one of our own manufacturing to Inbrew. We have also provided continuity of jobs and benefits to employees working on this portfolio who have now moved from Diageo-USL to be part of the Inbrew team. On the digital side, in.thebar.com is the hub for our brands to ENAble hosting landing pages of different brand campaigns.
The biggest initiative has been links to e-commerce in West Bengal, building the direct to consumer linkage of the bar with third-party aggregators like Swiggy, Boozie.in, BigBasket for consumers visiting the bar from that market. The social content calendar, which comprises of, you know, cocktails, knowledge, drinks, bars, bartenders, sort of tips, brands and celebrations also went live with now regular content available to consumers. We will continue to scale this up with more content, better user experience and engagement for the community. On our Society 2030 goals, we continue to progress towards our Society 2030 goals, aligning proactively with the SEBI disclosure requirement on business responsibility and sustainability report for next year. We have published on our website an independent environmental, social and governance report for the fiscal 2021-22. It has been prepared in accordance with Global Reporting Initiative Standards.
The disclosures are also mapped with United Nations Global Compact principles and Sustainability Accounting Standards Board sector-specific standards. This is further aligned with Diageo plc's ESG Reporting Index 2022. We request you to go through the above ESG disclosures, both quantitative, qualitative, for a comprehensive understanding of our objectives and progress in this space. Now a little bit on our financial performance. We have delivered strong top line growth and resilient EBITDA performance. Like for like, our business is bigger and stronger versus pre-pandemic levels of 2019. We have delivered a growth of almost 18% in the second quarter. P&A growth stands at 23%, growing on a strong base and the highest underlying growth in the last 24 quarters.
The price mix during the quarter was at 9.4%, reflecting the higher growth in more premium segments as we move up the consumer price ladders. More importantly, we are seeing sequential gains driven by the recent innovation and brand renovations in both mid-prestige and upper prestige. Double-digit inflation and ongoing cost pricing discussions led to supply constraints [that] adversely impacted our growth margins. Our marketing reinvestment rate during the quarter was 5.5% of net sales. We continue to drive customer-centric activation, strengthen our brand equity and premiumize the portfolio. We have also leveraged media opportunities on the back of marquee cricket associations like that on Asia Cup and the India-England series. Of course, you must be delighted with Virat's performance in the match that happened just a couple of days ago or yesterday. Yeah, day before. Yeah.
EBITDA was 446 crore and EBITDA margin was 15.5%. Underlying EBITDA, excluding one-off in previous year, was up 11%. Exceptional items primarily include a net one-time profit arising from the slump sale of the business undertaking associated with 32 brands in the popular segment. Profit after tax, after incorporating the tax-adjusted exceptional gain, was at INR 563 crore in the quarter, up 105.9%. Our outlook on inflation and pricing, we do expect double-digit inflationary pressures to continue to impact in the near term, driven by the sequential surge in prices of inputs going into glass manufacture and ENA . We are cautiously awaiting the ethanol blending policy that will stand announced in this coming quarter.
On the flip side, we are also seeing some green shoots in paper price and crude-linked commodities. Pricing realized in some of the states will now start ramping up in the quarters to follow. Revenue growth management and delivering on our productivity initiatives across the value chain will also help us to partially combat the inflationary headwinds. In conclusion, all I want to say is that we are confident in the resilience of our business, our strategy, and our ability to navigate headwinds as our team has demonstrated over the last couple of years. We remain focused on our strategy of reshaping the portfolio, driving commercial excellence in-store and on-premise, revenue growth management and everyday efficiency and productivity extraction. This gives us the confidence to deliver sustainable growth and create long-term value for all our stakeholders. With this, we can now open the line for Q&A.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Abneesh Roy from Nuvama Institutional Equities. Please go ahead.
Yeah, thanks. My first question is on demand side. So you made two remarks. One was premium and luxury growing faster than the overall P&A. Second is the customer is not down trading. He's consuming smaller SKUs just like in FMCG. So is it possible to give some insight, some numbers on both of these? A related question on overall P&A was, when I compare to pre-COVID, in terms of the specific channels of say pubs, bars, larger event consumption, for example, say large weddings or say offsites in hotels, is it now back to the pre-COVID, whatever data you have, if you can share on that?
Hi, Abneesh. Your question on, you know, I'll answer the second question first, which is that, you know, are events, marriages back to pre-COVID levels. Actually, yes, they are. You know, marriages are back and how. I mean, we are seeing larger and larger marriages, so that's, you know, pretty good for our demand forecast. Luxury premium, I mean, we continue to see the, you know, double-digit growth that we have been seeing for a while. That has not changed, really over the last few years. So, you know, the premiumization trend is continuing there. I would say even on the prestige side, we are seeing pretty healthy growth.
I would only caution that, look, it's just a few quarters after the opening up of the market, so, you know, I don't feel that the demand in these segments has fully settled. I would say, you know, basically mid and upper prestige. There is some level of premiumization that's continuing in these segments. We've seen a little bit of slowdown on lower prestige, right, which is primarily attributed to, I would say, upgrades from, you know, the popular and the country liquor. This is a bit slower than what we've seen over the last few years. You know, having said that, I think our brands are performing very competitively in each of these segments. Overall, we feel very confident about the demand scENArio in the industry.
Sure. My second question is on the specific statement you made on two of your brands. On Royal Challenge, you mentioned competitive pricing, and in McDowell's you mentioned some inflation impact. Now, inflation is across the board as a portfolio itself. What do you mean when you said that McDowell's is facing the inflationary impact?
No, no. My comment on McDowell's was largely to explain that we see some slowdown in the lower prestige category on account of inflation hitting that category of consumers, and therefore some slowdown in upgrades from, say, popular or country liquor to this segment. That's the clarification on inflationary impact on the category rather than McDowell's. On Royal Challenge, I mean, we, you know, were not fully competitively priced in a couple of states, and we have corrected that pricing, you know, to be competitive in those states. The brand is actually showing very good growth momentum, not only in those states, but across, you know, the market.
Yeah. Maybe an additional build, Abneesh, from my side, is that, look, I mean, it's ENA and I have consistently maintained over the last two, three quarters that when we renovated McDowell's and RC, we were not really kind of delighted with how RC had performed, right? Therefore, over the last three, four quarters, we were working on reengineering the blend to kind of make it grow further. Now what we have done with the Delhi RTM change and this competitive pricing reaction in Maharashtra and Telangana, we are pretty happy with the way it has responded.
Sure. One follow-up on that. Your corrective action in Royal Challenge, has it led to any retaliation by the other player? On Delhi market, if you could elaborate, what is the current situation?
Like we said, we were overpriced in you know, in a few of the critical markets. We've just become competitive on pricing, right? That addresses your first question, Abneesh. On Delhi market, maybe I'll hand over to ENA to talk about the renovation that we did and.
Look, I can't say there's retaliation. I think all competitors are following their strategy and continue to, you know, follow their strategy. You know, for us, clearly we had said that, you know, we will reshape the value proposition in mid-prestige through the renovation of Royal Challenge, and I think we are feeling very confident that we have managed to now reshape the value proposition, and we are seeing good results for Royal Challenge whisky. Therefore, we are rolling out this renovation, you know, to many more states sequentially. I think our strategy is now falling in place as we had expected it to, and competitors continue to follow their own strategies.
Sure. That's very helpful. That's all, from my side. Thanks a lot.
Thanks, Abneesh.
Thanks, Abneesh.
Thank you. The next question is from the line of Harit from Investec. Please go ahead.
Yeah. Hi, good evening, everybody. Wishing you all a very happy Diwali.
Yeah. Hi, Harit.
Just have two questions. First was on the quarter. You know, you mentioned that in your release that you know, you've successfully concluded discussions in a few states for Scotch prices. Would we assume now that you know, some of these you know, most of this is now in, you know, done with and supplies have normally resumed? Should you give us an update on that, on those discussions, as well as, you know, what's been the impact of that in quarter two for you?
In some of the states we have concluded discussions and, you know, supplies will be normalized in this quarter. Even in the couple that are pending, we expect closure on that during the current quarter. You can assume, you know, supplies will start getting normalized during the quarter.
Are we calling it? What is the impact in quarter two on account of this? Any basis point impact that you would have had on that supply in these states?
Harit, in quarter two, the quarter that has just passed?
Yeah.
Maybe I'll just start and then ENA can build. Look, it's not just one isolated factor of the bio supply. There are a couple of balancing factors, I would say. In terms of the benefits that we have got, right, I think it's two things. One is, Puja and West Bengal was a little ahead compared to last year, right? Therefore, the loading that happens into the trade happened a month earlier. Last year it was October. This year, large part of it was September. And it's so large that it does impact national numbers. Also, we were lapping a soft base of last year in two states, which is again Delhi and Bengal, because both were gearing for an RDM change last year in October, November. Therefore the July, August, September numbers were a little soft, right?
Conversely, these two benefits that we had in July, August, September this year are kind of balanced by the ENA supplies, right? Due to the pricing discussions, right? Now, net-net, yes, the two are kind of, you know, squaring off each other. Maybe some amount of moderation will happen to the 23% P&A growth that we have said. But, you know, we'll have to wait and watch over the next two-three months how much is that. Does that answer, Harit?
Yeah. Got it. Thank you so much. The second question was on if you look at the first half, you've done about close to 14.5% margins. I think 13.8 if you adjust for the one-off in quarter one and 15.5 in this quarter. This is in spite of your gross margins being, you know, close to 500 BPS plus, you know, down versus, you know, normalized levels, if I could call them so.
You know, does that give you more confidence on, you know, the medium-term guidance of mid- to high teens% or rather, you know, is there a possibility that given your cost structure currently you would look at, you know, maybe a revised guidance, you know, given the fact that you're already almost hitting a mid-teens number with such high inflationary pressures?
Look, Harit, again, let me start and, you know, I'll request ENA to build on that. First of all, yes, absolutely, we are committed to our mid to high teen guidance, right? Obviously it's our desire to kind of, you know, try and stay true to that. Now, having said that, let me start with what we are happy about, right? We are happy with the growth momentum, right? Which continues to give us an operating leverage on our fixed costs. That is something that we are happy about, right? We are also happy about the fact, too, exactly what you mentioned, that if you take the inflation impact, our growth margin is probably off by about 720-730 BPS, right?
We are offsetting a good one third of that time through a combination of headline pricing, mix management and management productivity, right? That again kind of reassures us. Now, having said that, we are also kind of maintaining a good cost discipline on our overall fixed overheads, right? That allows us to get a further operating leverage on our P&L. Now what ENA and I would ideally want to do a little more is the 5.5% on A&P. We would want to ideally inch that back to about, you know, 8%-9% A&P levels, right? And in this kind of environment, right, when the inflation is so steep, et cetera, you end up making some tough choices and calibrating that a little bit, right?
That's the way, you know, I'll pause here in case ENA has any additional build on that.
Yeah, I would say the year will continue to be challenging. Look, I mean, our inflationary pressures, we are not seeing them come down, you know, like other FMCG companies, right? Primarily because of the raw materials we use, which are glass and ENA. I would say there will be pluses and minuses. I mean, some pricing will flow through better in the coming quarters. You know, a little bit of mix advantage we will have. But on the other side, we do want to go up on A&P, as Pradeep said. I would say that, you know, we will try and of course stay true to our mid- to high-teens %, but I see our margins pretty much, you know, in this.
In the range.
In this range for the next few quarters.
Yeah. In the lower end of the mid- to high-teens.
Yeah. Yes.
Got it. Thank you very much. I'll come back soon after. Thank you.
Thanks. Thanks, Harit.
Thank you, Harit.
Thank you. The next question is on the line of Palak Shah from Infina Finance. Please go ahead.
Hi. Hi, Palak.
Hi. Thank you so much for taking my question and wishes for the festival. First question, I wanted to check with you after the deal conclusion, what sort of a quantifiable working capital release have you seen?
Working capital release.
Okay, Palak, yeah. Did I get the question right? You're saying that post the deal closure, how much of working capital has got released?
Yes. Yes.
The number is roughly about. It will come in two phases, right? The number is roughly about 420 crore. 280 crore- 285 crore is part of the slump sale. The balance 11 brands that we have franchised, that leads to a further relief of about INR 140 crore, right? Those are the broad ballpark numbers.
All right, cool. Secondly, just on the gross margin front. As ENA mentioned, there has been a lot of optimization that has happened this quarter. Plus, if you look at the excise, that's reflected in the excise component coming down instead of a 68-65 this quarter on a YOY basis. Despite that, our gross margin actually contracted to 13.5%. Is that indicative of high inflation and unless you get a price hike from the larger states like Maharashtra and Karnataka, you would actually be able to go back to that 44%-45% gross margin?
Look, Palak, you know, like I said, I mean, we've always maintained that the inflation that is impacting us is roughly in the double digit range, double digit to low teens, right? It's pure math, right? On a 40% growth margin, right, roughly that whatever, low double digit inflation will knock off roughly about 750 BPS of your growth margin. Simple math, right? What it has actually diluted by is roughly about 480 BPS, right? The way you will have to see it is that what we are being able to recoup, right, despite the commodity inflation, right. What I do acknowledge is there is still not too much of pricing flowing through in our P&L, right?
To the point that last year some of the Bioethanol reversals happened, we had to participate as you know, forced in by the government. A couple of competitive pricing actions that we had to get back to parity, et cetera, right? Therefore, there's not too much of pricing flowing through. Having said that, the inflation is also likely to continue, right? For example, you've seen the natural gas pricing announced by the government. That's a 40% increase already on top of an 80%-90% increase that was made in April, right? That sequential inflation will continue. We are confident, having seen the approvals come through, et cetera, pricing will also kind of, you know, ramp up in the coming quarters, right? That's broadly what it is.
Our growth margin will remain under pressure right now. We will have to just play with the other lines of the P&L and the other value drivers to kind of maintain our EBITDA margins.
Got it. Just if I'm going to follow up on this. Which states have you actually got price hikes during Q2?
We have got in the last three-six months over six states, right? I'm just kind of looking at, we've got pricing in Haryana, Punjab, UP, West Bengal, some pricing in Maharashtra and some pricing in Karnataka.
Karnataka. Yeah.
We have got pricing in all these states.
Got it.
Rajasthan, we have got pricing in the April-June quarter. Assam, we had got FE pricing in the Jan-March quarter.
Got it. Great. Thank you so much for this, ENA. Thanks, Pradeep. Best wishes for the festival.
Thank you.
Thank you so much.
Thank you.
Thank you. Next question is on the line of Latika Chopra from J.P. Morgan. Please go ahead.
Hi. Hi, Latika.
Yeah. Hi. Hi, Abneesh. Hi, Pradeep. I just, you know, further just digging a little bit more into the pricing part, would it be possible to, you know, tell us with 8% price mix growth for P&A portfolio, how much of this could be pure pricing? Because you did take some competitive, you know, pricing actions and, you know, you did get incremental price hikes from few states as well. Just wanted to understand where does, you know, net price effect settle down? What is the mix effect out of this 8%?
Yeah. It's largely mixed, Latika. 90% of this is largely mixed in this quarter. Like I said, net pricing flow through is minimal because of the negatives and the positives, but we expect that to ramp up, right? As the negatives fall out, right, and we've got fresh pricing from the states, that in fact will ramp up significantly in the coming quarters.
Pradeep, is it fair to assume that gross margins kind of bottomed out because the scotch pricing discussions which got concluded and some more might come in will flow through fully in Q3, and that also happens to be, you know, seasonally a strong quarter for you?
Latika, ENA, and one would want to believe yes. Now, unfortunately, the commodity environment remains a little volatile, right? I would have been in a far more confident position to agree with you, but come 1st October, natural gas pricing has increased 40%, right? As a result of which, you know, we are having to give the price increase to our glass suppliers. Then the big impact of the Delhi RTM, that's a reversal. That's a big blow all said and done. You know, Delhi was adding about almost four-five points of national growth in the last four quarters, right?
As the Delhi RTM has reverted back to its original, you know, pre-RTM change config, right, we will have to figure out a way to recoup that loss, through the rest of the country. How much of that we will be able to recoup, that is kind of yet to be established.
As things stand, Pradeep, does it imply that Delhi is kind of a no-go in a way? I mean, what's really happening there? Are the sell-throughs lesser, significantly lower?
Sorry, the?
In Delhi.
Oh, okay. The sell-throughs. Okay. No, we are waiting for things to stabilize, Latika, right? I mean, the rolled back RTM has come into effect from towards September and first week of October. Our sense is that things will stabilize over the next 60-90 days, and then we will be in a better position to call out what's the longer term impact of Delhi, right? It's too kind of volatile right now to talk what's the long term implication of Delhi.
All right. The last bit that I wanted to check was on, you know, your efforts towards non-whiskey portfolio. I think ENA mentioned that in her opening comments as well. What kind of growth are you seeing in this portfolio? What are the brands that excite you? Is that something, you know, which could become meaningful part of your growth contribution over the next couple of years?
Sure. I mean, I would say that both gin and vodka, right, are the you know categories that are really growing well. Largely because I think they're highly mixable drinks, right? They make for fantastic cocktails. Cocktails has really taken off, especially post-pandemic, right? I mean, during the pandemic and post, I mean, the cocktail culture, especially driven by millennials. You know, I'm very excited by both the category. I mean, we have really activated Tanqueray and Gordon's gin brands, right? You know, in the Tanqueray in the brunch occasion, Gordon's in the sundowner occasion.
Both brands are seeing very, very strong double-digit growth, I would say. Smirnoff, I mean, we introduced the pocket format of Smirnoff a quarter or two ago, and it rolled out during the thing. You know, we've done activation on-premise with Smirnoff, right, with our range of, I mean, our vodka going along with a range of other drinks. Smirnoff is also growing at a very healthy double-digit growth rate. I'm quite excited by the whites category per se. I think this category will continue to grow with millennials and this whole ready-to-drink that I was talking about in my opening narrative, which especially at the premium and luxury end seems to be a phenomenon to stay. We are continuing to invest behind these brands and grow them.
Sure. Thank you, ENA. Thank you, Pradeep.
Thanks, Latika.
Thank you. The next question is in the line of Kash from Anived Portfolio Managers. Please go ahead.
Hi. Yeah, it's Kash. Hi. Hi, Pradeep. Thanks for the opportunity. 2 questions from my end. You know, how large is Delhi contribution to our annual sales, if you could give some percentage?
Delhi will be broadly, I just have some broad ballpark numbers.
Yeah.
It will be about 6%-7% of our national P&A business.
7%. Okay. Got it.
This was on the revised ramp-up volumes, Prakash, right? Now, as I said to Latika earlier, we'll have to wait for what the volume settle down to.
Right. Understood. You know, in the first half, we've seen broadly a 50% impact on sales due to volume and 50% impact due to price and mix. As we, you know, progress more towards P&A, that contribution increases post the divestment, that should be two-thirds, one-third going forward. Is that the right understanding?
You mean volume to mix?
Yeah.
I would say. Well, yes, probably. You know, like we had said earlier, when we are selling the full portfolio, our price mix should stabilize around the 7%-8% range, right? Once we have the full Scotch availability and we're supplying across the country, right, and the full portfolio, our price mix should be about seven-eight, right? And then, yes, our aspiration would be that volume can also. Probably it'll remain in this, in the 50-50 kind of range.
Yeah. I expect it to remain.
Okay.
Pretty much the same way.
Broadly. Okay.
Because we have our volume growth in the prestige categories and things. I wouldn't expect that to
Majorly change. Okay.
It should be in the 50/50 range.
Lastly, you know, as this, again, contribution of the premium segment increases, there have been, you know, carton cost reductions. There have been declines due to, you know, some of the mix changes. Could you call out a number or annual impact which could happen once, you know, on a full year basis or next year once this entire sale has gone through?
Sorry, Prakash. I missed the question. Can you repeat that? I know it's to do with the divestiture. Once the divestiture
Once the divestiture is done, yeah, on an annual basis, if you could help us understand, you know, carton costs will decline as we premiumize and, you know, we don't put outer cartons on the premium brands. Is there a number which you can-
Nothing to do with the divestiture. Yeah, it's got nothing to do with the divestiture, right?
Mix will also change. As the mix changes, you know, the gross margin obviously will trend upwards, and this as a percentage of cost could reduce. I was trying to assess the annual reduction due to this change, irrespective of the divestiture. If you can call out, that'll be helpful.
I mean, we haven't really called that out so far, right? Yes, I mean, we are consciously kind of going to phase that out, right, starting from, you know, another, you know, couple of quarters down the line. We haven't publicly called that out, you know, point out that number. I mean, once the year-end comes out and then we'll have more clarity on that.
Sure.
We'll have actuals to share.
Sure. Thank you. All the best. Thank you.
Thank you so much.
Thank you. The next question is in the line of Chetan Shah from Jeet Capital. Please go ahead.
Hi.
Hi. Thanks. Wishing you all a happy Diwali. Just one quick and maybe a little broader question. I'm just taking the liberty to... The ENA madam is around. When we see our mix of volume and revenue in three different categories, if one wants to fast-forward and then look at a business profile three years from today or five years from today, what is the most optimal mix which you would want to see it, beyond which you may not want to tinker around, with the mix of both volume and the value mix? Just to get a sense, from a team's point of view that, looking at India as a market which has a customer in all three segments.
How do you see that shaping up?
Yeah, I think we did cover it briefly in the previous question. I mean, we've been delivering, you know, eight, nine, 10% mix as we transition in the portfolio. My expectation is that, you know, over a steady state, right, maybe in a couple of years or whatever, we expect the mix to settle at about, I would say, 6%-7% impact, right? I mean, the broader reshape of the portfolio we have completed now with the divestiture and the franchising of our popular.
The big action that we wanted to take on our portfolio reshape is done. You know, as we grow P&A now and focus more on that, I would imagine that a steady state 6%-7% mix impact would probably be something that we will use as a measure of success.
Great. Thanks. Now in a couple of questions before you kind of alluded about the opportunity into a gin and other category. If I may take a liberty to understand from a Diageo's global product portfolio, you kind of spoke about this couple of quarters back also. Just to get a sense, how do you see this. I know from a competitive point of view, you may not want to talk about it, but just as a category, if you can give us some sense, which can become a future growth driver, maybe from next three or five years horizon, apart from the whiskey as a category, from a volume point of view. If you can share, that'll be very, very helpful.
Sure. I mean, from a global point of view, we saw gin really explode, I would say, particularly during the pandemic. Basically, you know, it had a lot of momentum the last three to five years, I would say. In India, we saw the movement on gin start really maybe a couple of years ago, right? Vodka also has in our country, it is growing quite well. I would say that vodka around the globe is not as fast-growing as gin, but vodka is growing very fast in India. Like I said, I'm quite, you know, excited about the growth potentials in the whites category, both gin and vodka.
You know, even the craft gin segment is quite exciting, and as you know, we've invested in new brands which are Hapusa and Greater Than gin, which are the craft side of gin. We're quite excited about this category. I do have to say though that we want to be more value-focused than volume. We will play joyfully in the premium segments, in the right segments in Prestige and Above in both these categories. This is reflective of our overall philosophy of you know supporting consumers to drink better, not more. The value strategy really ties in with drinking better, not more. We are quite committed to you know moderate consumption, but help people drink much better products.
Thanks, ma'am. Just one small last question from my side. In terms of the premixed drink, which is kind of another fad which goes and comes, do we have any thought process around that specific segment? Because we spoke about white spirit. Just to get your view on that. Wish you and team all the best and a happy and a prosperous new year.
Yeah, thank you. I think you were talking about ready-to-drink category.
Yes, ma'am.
If I'm not mistaken, right?
Yes, ma'am.
It's a category that we have said. Look, we saw traction in ready-to-drink, say, in markets like, USA and, you know, in the U.K., right? During COVID. In India, the category is. It's been pretty volatile actually. For a while, it has not really grown. There are some smaller players who have come in now. You know, we have seen some selective growth. It's a category that we are watching, right? It is a category that we are watching more from a future back lens. If we see the trend really accelerate and the consumer acceptance of premixed, drinks go up, substantively, then we have a very rich portfolio of drinks, you know, in our global portfolio that we could potentially bring to India, or we could explore making, you know, the ready-to-drink in India itself.
It's a category that we are watching, and we will look at participation if we feel the time is right and the traction is high.
Right, ma'am. Thank you so much, and wish you all the best.
Thank you so much.
Thank you. Next question is from the line of Mehul Deshpande from JM Financial. Please go ahead.
Hello.
Hi.
Good evening, ma'am.
I have just two questions. One was obviously, you know, you have seen hyperinflation in some of your raw materials, especially P&A. In that context, how do you see backward integration? What is your thought on backward integration? Do you see that as a possibility in coming years, which Diageo would like to look at? That's the first question. Second question on the packaging side, I think there were a lot of articles, wherein, you know, there have been mentions about removal of mono cartons. Do you see that as a material benefit coming to you guys also, especially on the lower end of P&A segment? Maybe not in FY 2022, but let's say in FY 2024.
Yeah. Let me take your first question, which is the backward integration. Look, nothing is off the table, right? Absolutely nothing is off the table. However, I do want to share that our own experience is that you can kind of get the same level of efficiency and, you know, benefit through aligned partnerships, right? But like I said earlier, nothing is off the table. In case we feel there is a great opportunity of backward integration, whether in partnership with someone, right, or on our own backing, et cetera, we won't shy away from kind of, you know, exploring it and taking it further, right? That will be the response to the first question. Your second question, just remind me, Mehul, what was your second question?
On the removal of mono cartons.
Removal of. Yeah, on the removal. Just to kind of close out the first question, I mean, the one classic example that we gave is that, you know, we have got.
You know, an asset-light model. We have always kind of, you know, preferred to get additional growth capacity through aligned bottling partners. Similarly, our entire, you know, Extra Neutral Alcohol footprint, right, of co-location, et cetera, is always through third-party partners and aligned, you know, bottling partners, right? Now, on the removal of carton, we addressed that a couple of minutes ago. Yes, we are. You know, we have communicated that we shall be doing that over the next couple of quarters in a phased manner, starting with some brands and then gradually kind of expanding to the rest of the portfolio. We will be in a better position to share more details as we start taking those actions, right? Starting in the January-March quarter.
I would say that the removal of carton is being driven partially by productivity and you know cost considerations but to a very large extent by our sustainability objectives right? This is one big way of removing or reducing our carbon footprint and our Society 2030 goals which you know are very aggressive. I mean this is one of the big initiatives. We are taking many more such initiatives to reduce the carbon footprint. I would say that this thought of removing the cartons has come even before you know this unprecedented inflation and it is driven by that larger objective of sustainability.
That's the primary objective, and obviously the secondary objective is yeah, we will get some productivity, which in the current environment we will not complain about.
Thank you. Thank you, sir. That's all from me.
Thank you.
No message found.
Thank you. The next question is from the line of Manish Poddar from Motilal Oswal AMC. Please go ahead.
Yeah, hi, team. Thanks for this call. Just want some clarity. If you could help me understand, you know, the ad spend which you've done this quarter, you know, how much of that would be for DIL and Diageo?
I mean, we normally don't share a breakup of that. We can just say that, look, because Diageo, some of the pricing discussions were ongoing and our salience was a little low, right? We had consciously calibrated the A&P spending also on that segment, right? Normally we don't share that level of detail, right? All we can say is, leave the portfolio to us. We are committed to deliver and commit to high-teens, you know, margin guidance on a 15 basis.
I would say that the A&P spend is really in service of brand equity of, you know, building the brand equity of all the brands that are focus brands for us. You know, when we renovated and innovated Royal Challenge American Pride, Royal Challenge Signature. We are, you know, putting the A&P spend behind all the key brands that we are focusing on. Black Dog, which was renovated and, you know. We derive huge amount of effectiveness and efficiency out of this spend to ramp up our brand equity. Like Pradeep Jain said, we have calibrated on Diageo because Diageo supplies, you know, pricing discussions were on.
Quarter-over-quarter, I think we take those calls on which brand have the activations, which brand have some and, you know, keep it quite dynamic as allocation of A&P spends.
Here just two points to clarify. First is this 10% margin, this distribution margin which we get is post allocation of ad spends, right?
That's right.
That's right.
That's right. It's a post allocation of ad spends and overheads also, right?
overheads also, right?
Yeah.
Let's say with size and scale, I think this agreement was done somewhere around 2014-15, if I'm not wrong. This means about seven-eight years now. You know, with size and scale, you know, can we rework this number? Or this is. You know, I understand it's a global business transfer agreement which you've been alluding earlier. You know, with. You know, do you get operating leverage on this business? That is what I'm trying to understand.
Two responses. One is, it's got nothing to do with the agreement signed earlier. Like I said, this is an independent global transfer pricing norm, right? There is an independent third party benchmarking study that if an independent third party distributor was to import these brands and sell in India, what kind of a margin will they make, right? That's the kind of rationale of why we get the 10%, right? Now coming to your second point, do we get operating leverage? We get significant operating leverage, right? I mean, you know, like we said, the 10% is after full A&P spending and after full overheads loading. Because these are very, very high premium priced brands, they do absorb a fair amount of overheads, right?
We've got dedicated sales team, we've got dedicated demand generation teams, et cetera. It's a fairly high overhead structure model, right? We get to absorb all that and then land the 10%, which we have said that on a EBITDA rupees per case as well as on a return on invested capital, it is highly accretive to our portfolio.
Sorry, what I'm trying to understand. You know, thanks for the explanation. What I'm trying to understand is, let's say if you're doing X UPCs in absolute number today, and let's say that X UPCs becomes 2 X in, let's say, next two or three years. You know, whatever the rate of growth and stuff is. I'm just trying to understand if you make. Do you look at absolute margin or you look at EBITDA per case internally when you're looking at these numbers?
No, in terms of what we are allowed to make or in terms of how.
What you're allowed to make.
Right.
What you're allowed to make, let's say. Because
Which is 10%. That's a variable number, no? It's a percentage margin number.
It's a percentage margin.
It's a percentage margin. That's right.
Okay. Sorry, just to hop on it. Let's say even if you double in size, you'd still make a 10% margin only.
We'll make 10%. Yeah, absolutely.
That's how it is.
Third-party benchmarks change, and that warrants a change in the margin.
Because your ad spend and all will get calibrated with size and scale, right? I'm just trying to understand, does this margin number move up or that is static.
Yeah. Similarly, on overheads also we get operating leverage.
Okay. Fair enough. Thank you so much.
Thank you.
Thank you. Our next question is from the line of Rohan from Goldman Sachs. Please go ahead.
I thank you for this opportunity. I just want to understand your pricing negotiations that you are having with state and central. Hypothetically
Disturbance in your-
Loud?
There's a lot of background noise. We're not being able to hear your question.
Is it better now? Hello?
Yes, the background noise has gone away, but it's still a little checkered, your voice.
How is it now, can you hear me? Is it better?
This is better.
My question was on this price negotiation on scotch that you're having with various states. Hypothetically, let's assume that in the next one year, the prices were to go up, right? Do we need to go back to the states where the price negotiation have already taken place? Or have you negotiated a mechanism wherein any inflation can be a part too?
Well, to answer that, I wish the second part was true. Unfortunately not. You know, the short answer is we do have to go back annually and negotiate the price increase again. We have not yet found a way to, you know, get the governments to, sort of set a mechanism where, you know, inflation links or whatever that you're alluding to. Yes, we will have to go back and negotiate every year till such time that we can find a reasonable mechanism with the government.
I mean, what you have mentioned will be our desired end state.
Have we been trying for this?
We'll continue to advocate for that.
Okay. That's what I wanted to check. Secondly, now that you know the sale of the category has been completed and we'll be generating a lot of cash. Any thought process on what you want to do in terms of payout? Because you mentioned you know you need to recoup some of the losses. We are almost near that phase, right? Do you want to comment on how the payout would pan out in the next two years?
Yeah. I mean, we are kind of in discussions on, you know, how and, you know, like I said, in the last call also, we would officially renew our dividend distribution policy over the next three-four months as we are working through it. Just to give a broad dimension of numbers, when we exited March 2022, right, we had accumulated losses of about INR 1,050 crores on our balance sheet. Now, in the six months after incorporating the one-time profit from the sale of the divestiture, we have recouped about INR 750 of that, INR 750-INR 760, right?
That leaves about 300 crore, which over the next couple of quarters, right, if everything kind of remains as is, we should be able to recoup, and therefore we should be in a position to kind of get back to dividend distribution by the end of this financial year.
That's great. Thanks a lot for answering my question and all the best and best wishes for this festive season. Thank you.
Thank you.
Thank you so much. Thank you. This was the final question for today. If your questions have not been answered, please feel free to contact Richa Parewal, Head of Investor Relations. I will now turn the floor back over to Ms. ENA Nagarajan for closing remarks.
Thank you very much, and thanks to all of you for participating today and for all your questions. To wrap up, I would really like to say that I can best describe this time as a celebration of our culture and a great example of how diverse experiences and perspectives drive growth and create value within our organization. We continue to be very focused on building on our current top-line momentum . We will continue to invest in and accelerate what's already working and explore future growth opportunities to further unlock value from our ecosystem. Finally, I would like to express my gratitude to all for their continued resilience, passion and ownership within our organization. A big thank you to all of you for your time today and your ongoing partnership and support of our business.
Wish you a really lovely festive season ahead. Thank you so much.
Thank you very much. Ladies and gentlemen, on behalf of United Spirits Limited, that concludes this conference. Thank you all for joining us and you may now disconnect your lines. Thank you.